Over the course of the past few days (weeks, whatever) we've increasingly heard claim after claim that "The Shorts" are attacking (ahhh!!), that there has been no attendent material adverse decline in the fundamentals to explain the sudden and substantial decline in asset prices. Just today, both John Mack and Lloyd Blankfein both put in calls to SEC Chairman Chris Cox whining for some sort of artificial protection from the invading shorts. Of course as dealbreaker pointed out, the irony here is mind boggling, but beyond that, there's a certain question - or set thereof - that has yet to be not only answered, but asked in the first place.
But I'll get to that in a minute after a little tangent.
As if it weren't bad enough that all this goes down the week of my birthday, but its the same week that I was looking forward to spending some quality time training for a charity 10-k road race this weekend. Rewind about 3 hours, I'm on the treadmill watching CNBC, and lo and behold they dared to put a Public Pension manager on air to get his opinion on the current short selling issue du jour. FIrst, money managers, especially Pension managers are notoriously righteous and annoying, even moreso when they happen to be from the self-righteously annoying mecca that is California (and even moreso when they are painfully out of shape, but I digress...) Second, virtually all money managers have an uncanny ability to unabashedly pump up their own positions, often by spouting off some mix of unadulterated nonsense and vaguely truthful financial theory. The very best ones - like Bill Gross - are so passive aggressive, so insanely pathological that to watch them speak is nothing short of inspiring.
Anyway, back to today. 8pm, CNBC. Enter CALSTRS CIO Christopher Ailman to learn us all how the SEC has to, HAS TO put a moratorium on short selling. I wish I had TiVo'd his appearance, because it was enough to get me riled up enough that I cut my workout short to come home and write this nonsense.
Ailman, apparently completely unsatisfied with the actions already taken today by the SEC to combat the alleged market manipulation by those dastardly Shorts, claims that long-term (read: lumbering institutional and retail) investors portfolios are being systematically destroyed by the ninja-like Shorts. Now, I use the ninja reference entirely on purpose, since despite countless allegations, no one has yet to identify who, exactly, these alleged Shorts actually are besides pointing the finger at "hedge funds" in general, hardly an enlightened perspective.
What makes this allegation even more interesting is that some of the biggest hedge funds are run by Banks. JP Morgan and Goldman Sachs rank amongst the top-10 largest hedge funds by AUM, Citigroup, HSBC, and a variety of other Wall Street firms are all in the top 50, with many more falling within the top 100 according to Institutional Investor. As if this weren't enough, independent hedge funds almost exclusively use Wall Street banks as prime brokers to clear their trades, lend them funds or stocks, and provide a variety of other services critical to their ability to carry on their operations. This is to say nothing of the trading desks WITHIN each bank tasked with trading the firms own account. Unless there was some strange, unheard of benevolence handed down from the Lloyd himself, do you really think the prop desk at Goldman wasn't shorting Morgan Stanley in serious size today, and vice versa, for example? Right.
The main-stream-media seems content to stop here (since they've already determined who the Shorts are) and routinely fail to take it to the next level, to ask, quite simply, why? Why short every single share of every financial company you can find (or not find, according to some like CALSTRS' Ailman)? Why put not only your counterparties, trading partners, and funding sources out of business, but why do so when their ability to act as prime broker (among other capacities) is absolutely critical to your ability to conduct your business? It just doesn't make any sense.
Some have blamed it all on algorithmic trading - that millions of very similarly-programmed computers are sending thousands upon thousands of trades to all sell the same stocks all at the same time - as the cause. This may seem like a convenient explanation, but just because the computer models control (most of) the trading, at some point the humans who run the computers would (I hope) realize that the success of the short financial trade is indirectly proportionate to long-term ability of the firm to continue as a going concern. Naturally, there is an equilibrium, a balance somewhere between complete destruction of the global financial system and totally forgoing any-and-all short profit opportunities, the question then is where?
While I'm not so naive so as to presume that there aren't billions being made by various hedge funds in the recent extreme downward moves we've seen recently, I also find it very hard to believe that some people who actually used to teach game theory are completely ignoring it.